Tuesday, January 18, 2011
Fiscal Time Bomb Ignited: National Debt Breaches $14 Trillion
Though you could see it coming long ago, a lamentable moment in US history has finally been reached; the national debt has now eclipsed $14 trillion, a truly mind-boggling figure.
To put this in perspective, the total amount of currency in circulation in the US is less than $1 trillion.
For further perspective, the estimated US GDP last year is $14.7 trillion. Given our tepid economic growth, and the rapid pace at which the debt is climbing, it may not be long before the debt eclipses GDP. That would essentially define bankruptcy.
Early last year, Congress preemptively raised the debt limit to $14.3 trillion in an effort to circumvent this hot-button issue in the midst of the mid-term elections.
However, next month, Congress will begin a huge political battle over the nation's finances and there is the potential for a government shutdown, though that possibility may amount to nothing more than political gamesmanship.
Yet, the bond markets may soon become spooked and insist on much higher interest rates to continue their lending to the US. Interest payments alone will soon eat up an inordinate share of the federal budget. According to the Congressional Budget Office, interest payments on the debt could balloon to $800 billion a year, or 3.4 percent of the economy, by 2020.
There is also the distinct possibility that foreign lending could come to a halt if sovereign governments come to doubt the US's ability to repay them.
At present, the government is borrowing 40 cents of every dollar it spends.
One thing that most Americans don't realize is that the US must continually borrow money just to pay off old debts. In other words, current bond buyers are funding the redemptions of previous bond holders.
Due to fiscal mismanagement and an inability to square revenues with expenditures, the national debt has grown precipitously over the past decade.
According to the Treasury Department, the nation's debt stood at $5.8 trillion on September 30, 2001. By the same date in 2008, after the engagement of two wars and two rounds of tax cuts, the debt had grown to $10 trillion. And more than two years into an economic crash and stagnation, the debt has now crested beyond $14 trillion.
There is no let up in sight. The US still has troops on the ground in Iraq and Afghanistan. It's emblematic of the American Empire; the US presently has 500,000 military personnel stationed on over 700 military bases in more than 150 nations.
Last year, the government estimated that the Medicare Hospital Trust Fund would be depleted in 2017, a mere six years from now. The projections for this date with destiny could change for the worse; in 2009, Medicare ran a deficit for the first time.
The timing couldn't be worse. This month, the beginning of an enormous wave of Baby Boomers began turning 65 and applying for Medicare. The Boomers are 78 million strong and account for roughly a quarter of the US population. They will continue applying for Medicare every month for the next 18 years, assuming Medicare lasts that long.
The US government's total unfunded liabilities for Social Security and Medicare are now in excess of $100 trillion (no, that's not a typo), and that number is only growing. Yet, the private net worth of all Americans was estimated at just $53.5 trillion dollars in the second quarter of last year, according to the Federal Reserve.
This means that more money is owed than exists in the US. In other words, those liabilities can never be paid.
The problem may be even worse. Using Congressional Budget Office data, Boston University professor Laurence Kotlikoff created quite a stir last summer when he calculated the fiscal gap of the US at $202 trillion. The fiscal gap is the present value difference between projected future spending and projected future revenues in all future years.
As if that isn't bad enough — all by itself — our problems go well beyond entitlements.
The US imports more than two-thirds of the oil it uses, part of the reason the trade deficit reached $38.3 billion in November. More on that in a moment.
Through the first 11 months of 2010, the trade deficit was running at an annual rate of $500.4 billion, 33.5 percent higher than in 2009 — a year when the deep recession cut into Americans' appetite for imports.
For decades, the US has led the world in imports, sending trillions of dollars overseas. The trade deficit is a significant reason why we are the world's biggest debtor nation.
The US has held a trade deficit since 1976, and there is no reason to expect that this will change any time soon. Unfortunately, the US will remain hampered by the fact that exports account for just 12 percent of GDP. That is not something that can be fixed quickly or easily.
Though manufacturing expanded for the 17th consecutive month in November, it still accounts for just 11 percent of the US economy. That will not help us dig out of the hole we are in, create new jobs, or significantly reduce the trade deficit.
When all of this is added up, the long term prognosis for the US just isn't good. There are numerous factors working against us all at once.
The US economy is overly reliant on foreign oil, importing two-thirds of what it uses. Without oil, there can be no economic growth, something our system is entirely predicated on. The problem boils down to a limited supply and an ever-increasing global demand.
Tom Kloza, chief oil analyst at the Oil Price Information Service, says that for the last six months, or so, worldwide oil demand has exceeded supply.
"Once demand really comes back online full force, refineries in the US will not be able to satisfy both demand for diesel and for gasoline," says Kevin Kerr, editor of Kerr Commodities Watch. "The days of cheap gas and diesel are certainly over."
As if on cue, last week the US Energy Department warned in a report that retail gasoline prices could top $4 per gallon later this year. That would be very bad for the US economy.
“If the US had a sustained period of $4 gasoline prices, a second recession would be a near certainty,” says James Williams, economist at WTRG Economics.
There is a widespread belief amongst analysts that oil will reach $100 per barrel this year. That will adversely affect everything in the US economy, from shipping and transportation, to food production, to manufacturing. Simply put, everything in our society is oil dependent.
Then there's the matter of the dire fiscal position of most states, some of which will certainly request further federal assistance. It's one thing to deny bailout money to banks and other corporations, but can the federal government say no to the states and their own citizens? It all gets very complicated.
One in seven Americans now receive food stamps. That's a great expense to the federal government.
Additionally, the U-6 unemployment number was 16.7 percent in December. This category includes those who are unemployed and actively seeking work, 'discouraged workers' who have given up looking because they believe no work is available for them, and those who can only find part-time work, even though they want full-time employment.
All told, this amounts to one-in-six Americans in the work force.
Though that is certainly a startling number, the U-6 figure is widely viewed as an underestimation by economists.
The jobs problem is so bad, the states have been overwhelmed by the millions of Americans seeking unemployment benefits. As a result, they have turned to the federal government for assistance. But the federal government is also broke.
Because of this, Washington will be sending the states a cumulative bill of $1.3 billion this September. The government is seeking reimbursement from 30 beleaguered states for the money they borrowed to cover the unemployment benefits they couldn't otherwise afford.
However, that amount only covers interest; the states have borrowed a total of $41 billion to manage unemployment payments so far, and the federal government says that total may eventually reach $80 billion.
For some states, it may take years to pay off these loans. The total state debts are the highest in the 75-year history of the unemployment program. And this doesn't even take into account that the nation's unemployment problem isn't expected to improve significantly any time soon.
Where will the states find the money to repay those loans? As the saying goes, you can't get blood from a stone.
The US is in the midst of a perfect storm, in which all of these assorted crises are reaching a critical mass, and they are now feeding on one another, making the eventual outcomes even worse.
The nation is in the midst of simultaneous fiscal and monetary crises. Our financial position is tenuous and our economy on shaky legs.
It is only a matter of time until taxes are raised, entitlements are cut, interest rates spike and inflation (which is a lagging indicator) begins to rise.
Many Americans will be stunned and embittered when they discover they will not receive all the benefits they have been expecting — that they were promised. With the inevitability of future tax hikes, Americans will be asked to give more and receive less.
The US has reached the point of no return. There will be financial and economic chaos, marked by a continually devalued dollar and a shrinking economy. There will be growing poverty, more homelessness, more desperation, and the likelihood of civil unrest at some point.
When the government money stops flowing to those expecting and needing it, the results will be disastrous.
We have crossed the Rubicon.